The New York State Department of Financial Services – which supervises & regulates the activities of the state’s approximately 1,500 banking and other financial institutions with assets totaling more than $2.6 trillion and more than 1,400 insurance companies with assets of more than $4.7 trillion – recently issued a note to the CEOs of those institutions to urge them to make diversity of leadership “a business priority and a fundamental component of their corporate governance.”

The notice says that the NYDFS will survey institutions about their management & board demographics. Early next year, the NYDFS will publish the results on an aggregated basis. The regulator says it will consider continuing to collect the data in the future, including on a more granular basis. This is just one more nudge to spur banks toward leadership diversity.

The Industry’s Diversity Gap

A 2021 report issued by “The Committee for Better Banks” examined some of the largest US retail banks and found that people of color remain under-represented in the finance/insurance industry. Even where diversity was observed, people of color are over-represented in lower levels in the organization compared to the number of white peers. Furthermore, Black and Latino employees are 25% less likely to be promoted or hired in senior management and executive positions.

A 2019 assessment of banks by the House Financial Services Committee reported less than one-third of executives and senior-level workforce identified as female, although more than half the US population identifies as female. Banks also under-represented people of color in board positions relative to the US population. A 2018 McKinsey report showed that the proportion of people of color in financial services drops 75% from entry-level positions to the C-suite.

The Growing Focus on Leadership Diversity

The NYDFS’ new move is far from the first initiative focused on closing the banking & financial industry’s diversity gap. The Dodd-Frank Act – which was passed over a decade ago – required all covered government agencies to create an “Office of Minority and Women Inclusion.” In 2015, several agencies (the OCC, FDIC, NCUA, CFPB, SEC, and others) issued a statement that established joint standards to provide guidance on assessing diversity policies and practices.

We don’t know if or when the SEC will adopt additional rules on this topic, but SEC Chair Gary Gensler and Commissioner Allison Herren Lee seem to favor the idea of more disclosure. State Street Global Advisors, BlackRock, Vanguard, and Goldman Sachs are among investors that have announced they’ll be taking a special interest in the diversity of public company leadership, along with proxy advisors whose recommendations affect the outcome of director elections. As we’ve blogged repeatedly on TheCorporateCounsel.net, that’s on top of a potential “comply or explain” Nasdaq listing rule and interest from D&O insurers.

But wait, there’s more! In 2020, the House Committee on Financial Services also highlighted the lack of diversity among big banks’ boards and senior management – and recommended that Congress take legislative action. At the state level, California led the way with legislation requiring publicly held corporations with principal offices located in California to meet board diversity quotas by the end of this year – at least 3 women on boards of 6 or more, and at least one director whose race or ethnicity is under-represented. There are now 14 states with board diversity statutes in place or proposed.

Abroad, Belgium, France, Italy, and Norway have enacted requirements to increase women in senior leadership in their largest publicly held companies. Legal & General Investment Management (LGIM), the largest fund manager in the United Kingdom, informed US S&P companies that it expects more racially diverse boardrooms by 2022. In addition, as Liz recently blogged on TheCorporateCounsel.net, UK-based Fidelity International’s new policy gives that asset manager leeway to vote against directors of boards that have fewer than 30% female representation – which is a higher bar than many US-based investors have set to-date.

Expectations of the NYDFS

The NYDFS expects regulated banking and financial institutions to make diversifying their leadership a business priority – and an essential part of corporate governance. The regulator is calling for institutions to view diversity like other strategic priorities by communicating its importance to all stakeholders, providing a plan for achieving it, setting measurable goals, and tracking progress toward those goals.

The NYDFS views data collection as a first step towards helping banks set goals & measure progress – since they’ll be able to see where they stand compared to aggregated peer data. The stated goal is that this will raise the bar for the entire industry through transparency and accountability. Responding to the survey appears to be voluntary – but “strongly encouraged.”

The Takeaway

For DEI officers who are trying to get buy-in, support, and resources within their organizations, these types of letters are job security. Even beyond the intrinsic and strategic value of DEI that this letter emphasizes, it also shows that diversity demands aren’t going anywhere, and demographic info is going to come to light one way or another. When that happens, your company will want to look good. You don’t want to be caught without processes in place for gathering the data – or have abysmal (or even mediocre) results to show.

For corporate governance, securities and ESG folks in the banking industry, you’ll probably also be involved with responding to this survey! And even though the data is going to be published on an aggregate basis, you still need to make sure that what you submit to the regulator goes through adequate controls and is accurate – as well as how the responses align with any other reported data. Learning new info through this process may also affect goal-setting, recruitment efforts, board committee responsibilities, and strategy. The letter underscores that diversity is a board-level strategic issue.

Even if you’re not in the financial industry, these types of initiatives have a way of working through to other sectors.

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